For most of history if a ruler wanted to either avoid a violent conflict or cement an alliance there was a standard protocol. Marry off the children. Alas times have changed. There is precisely zero chance that US government leaders are discussing the possibility of uniting Hunter Biden and Xi Jinping’s daughter – Xi Mingze – in an effort to improve US-China relations.
I posit that the closest modern-day equivalent to marriages of state (diplomatic marriages) is economic integration. Trade deals. Foreign direct investment. Apple building their iPhones in China. It might surprise you to hear that US imports from our arch geopolitical rival will likely hit a new record in 2023. See below chart showing import data through 2022:
This is a good thing!
The chart above – while impressive – is in one sense quite misleading. China’s role in the global supply chain has evolved dramatically over the past decades. They don’t just make cheap shoes and steel anymore…
Apple had nearly $400 billion in revenue last year:
- iPhones: $205B
- Mac: $40B
- iPad: $29B
- Wearables: $41B
- Services: $78B
According to 9to5mac – an Apple focused blog – more than 95% of iPhones are assembled in China. The figures for Mac, iPad and Wearables are probably similar. And, without the products assembled in China there would be no services business. Hence it’s not much of a leap to say that virtually all of Apple’s revenue is enabled by China.
Going back to our chart above US imports were nearly $540B in 2022. The right way to think about this figure though is that it is the visible tip of the iceberg.
I’m going to introduce two new terms:
China-dependent revenue (CDR) and China-dependent value (CDV)
I think it’s reasonable to consider all of Apple’s revenue as being China dependent. 95% of hardware is made in China. Probably 99%+ of services revenue is generated by users of their hardware. The remaining 5% of hardware that isn’t made in China is still reliant on the strength/R&D made possible by the rest of the business.
Net-net we have ~$400B of China dependent revenue from just one company.
The next obvious low-hanging fruits to make my point are Amazon and Walmart. It was hard to find estimates of the percent of products sold on Amazon and Walmart that were made in China, but the figure is at least 50% and could be much higher. For reference, electronics are the largest category on Amazon and 90% of computers are made in China.
Amazon’s gross merchandise volume was $600B last year, and Walmart’s non-grocery sales in 2022 were $268.84B. If we add the figures and then attribute 50% of it to China then we come up with another $434B in China-dependent revenue.
To summarize, just these three businesses have $834B of CDR - starting to make the import figures less impressive eh?
Now let's look at CDV.
The reason I'm thinking about this at all is because of the ubiquitous discussions around the potential for a China-Taiwan conflict. In the event of such a conflict it's likely (obvious even?) that
China would be able to cut off Taiwan's exports to the rest of the world by setting up no fly zones and encircling the Island with their Navy. Hence, I think it's fair to lump China and Taiwan together when considering CDV and CDR.
Without China there is no Apple. That much is obvious. So, we can attribute 100% of Apple's $2.38T valuation to our CDV category.
Amazon probably has between 60 and 75% of their market value attributed to AWS. AWS would not exist without chips from Taiwan, so we can add between 60 and 75% of Amazon's market cap to our CDV category right off the bat.
If we use the percent of retail revenue derived from China-based products to calculate the CDV for Walmart and Amazon's retail business then we come up with $92.5B for Walmart and a range of $119B to $190B for Amazon (depending on percent of their valuation attributed to AWS).
Net-net, between the three companies we have the following range of CDV: $2.59T to $2.66T
Just from three companies...
There are some caveats. Amazon could buy Intel chips after Intel had ramped production. Apple would over time be able to move manufacturing out of the country. Vendors on Amazon would find new sources for their wares. But this would not take months - it would take a decade +, and the end result would be more expensive products and less profitable businesses.
It all leads me to believe that if there is a conflict - and even if it is violent - it will be short lived because the global value destruction is too immense and would benefit neither China nor anyone else. Beyond that how things play out is anyone's guess.